Courtesy of The Automatic Earth.
Jack Delano Troop train on the Atchison, Topeka & Santa Fe, Grants, New Mexico March 1943
On June 11, exactly – only – a week ago, I wrote, in Japan Enters Financial Nowhere, about a new phase in Japan’s downfall, the demise of its famous savings surplus which had kept the worst of the worries about its economic reality somewhat at bay until recently.
When its economy crashed early 1990s Japan made one fatefully horrible decision: to not cleanse its banks of their debts, to do basically no defaults or restructuring. And this is the price they’re going to be paying for that decision: once there are no buyers for their cheap debt anymore, the fall will be deep, steep and fast. The rapidly ageing population will see their pension provisions plummet in value, and everyone will see taxes rise more than they can presently imagine just to keep a semblance of a government in place.
PM Shinzo Abe was elected in December 2012 and launched what soon became known as Abenomics almost immediately, It consists of three “arrows”: a giant increase in the money supply (though there was never a shortage), a huge increase in government spending, and “reform” measures, in particular a corporate tax cut. More on the latter below, I’d like to keep a chronological oder here..
A last(?!) desperate move by Abe is to be a massive switch from bonds to riskier assets by the $1.26 trillion Japan public fund GPIF, the worst largest pension fund. A move seemingly destined for failure, because the Bank of Japan has already killed off the market for government bonds by buying up everything. As David Stockman wrote, also on June 11:
Japan Pension Fund Plans Massive Bond Dump Into Dead Market
So this is how it works. Japan has the most massive public debt in the world relative to national income, but the implicit aim of Abenomics is to destroy the government bond market. After all, if inflation goes to 2% or higher, government bonds yielding 0.6% will experience thumbing losses. Even the robotic Japanese fund managers no longer want to hold the JGB – as evidenced by another session when no future contracts on either the 10-year or 20-year bond changed hands. [..] In effect, the BOJ is the bond market – that is, the buyer of first, last and only resort. [..] The implicit assumption is that the BOJ can ultimately buy all the bonds ever issued and the massive outpouring of new bonds yet to come.
On June 12, the Wall Street Journal ran this:
Bank of Japan Raises Export Hopes
The Bank of Japan raised its view on overseas economies Friday, building up hopes for a future pickup in exports that the central bank hopes will make the country’s domestically driven recovery more balanced and sustainable. Speaking after the bank left its monetary policy unchanged earlier in the day, BOJ Gov. Haruhiko Kuroda said it was fair to expect a moderate increase in exports given improvements in the economic situation abroad. Touching on action taken by other banks, Mr. Kuroda also said he saw no reason for the yen to strengthen against the euro following the European Central Bank’s recent easing decision. Japan’s recovery has so far largely been driven by robust domestic demand, departing from the economy’s usual reliance on the nation’s strength as an export powerhouse.
But a brighter outlook for the global economy could raise hopes for exports finally gaining traction in the coming months, possibly mitigating a likely temporary downturn stemming from a sales tax increase in April. The economy grew at an annualized rate of 6.7% in the first quarter of the year, but private economists expect it to contract more than 4.0% in the current quarter as the higher tax takes its toll on consumption. While Mr. Kuroda said the pullback in consumption after the higher levy was “within the range of expectations,” he held out hopes for a rise in exports on the back of a gain in the global economy. “The U.S. economy will likely accelerate its growth and the Chinese economy is heading for stable growth as its downward shift comes to a halt ” Mr. Kuroda said at a news conference. Against this backdrop, “it is fair to expect Japan exports to increase moderately,” Mr. Kuroda added.
Clearly, Mr. Kuroda is either lying or dreaming. I’ll gladly leave the choice between the two to your discretion. But I think it would be good to note that Kuroda knows about China’s problems, and he knows US Q1 GDP growth was negative, so it’s not overly obvious what his reliance on growth elsewhere in the world is based on.
Then, Reuters reported on June 13 that:
Japan’s Abe Unveils Plan To Cut Corporate Tax Rate To Spur Growth
Japanese Prime Minister Shinzo Abe unveiled a plan on Friday to cut the corporate tax rate below 30% in stages to help pull the economy out of two decades of sluggish growth and deflation. Investors have been scrutinising whether Japan can substantially lower the corporate tax rate – among the highest in the world – to spur growth in the world’s third-largest economy. Abe also needs to strike a delicate balance between stimulating growth and reining in snowballing public debt, twice the size of its $5 trillion economy. The corporate tax cut is a major issue to be included in the government’s key fiscal and economic policy outline, which will be finalised around June 27 along with a detailed “growth strategy” of structural reforms. “Japan’s corporate tax rate will change into one that promotes growth,” Abe told reporters, adding that he hoped the lower burden on companies would lead to job creation and an improvement also for private citizens.
While it’s true that Japan’s corporate tax rate is high, it’s just as true that Japan has the by far highest national debt among richer economies, and that therefore lower tax revenues may not only be no panacea, they may be a really bad idea. Abe could try to offset that with higher taxes on the population, but here’s thinking even he wouldn’t be that thick; for his plans to succeed even a little bit, he needs his people to spend more into the real economy, not on taxes. The April sales tax hike from 5% to 8% has been bad enough in that regard, so much so that step two of the hike to 10% next year has already come under heavy fire.
Today, the next blow in a by now long series is delivered through falling exports and imports numbers. Together, they may result in a shrinking trade deficit, but if the ultra-low yen we’ve seen since Abenomics took off (it lost 20% vs the US$) can’t even raise exports, what will happen now the lows are behind us?
Japan Exports Disappoint, Risks Hitting Economy Hard
Japan’s annual exports declined for the first time in 15 months in May as shipments to Asia and the United States fell, threatening to knock the economy hard at a time when domestic consumption is being crimped by a national sales tax increase. The data backs expectations for additional stimulus from the Bank of Japan in coming months, particularly if market confidence takes a hit as external demand proves elusive. “If exports fail to pick up while domestic demand stagnates, that would heighten calls for the BOJ to act,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Total exports fell 2.7% in May on the year, Ministry of Finance data showed on Wednesday, compared with a 1.2% drop seen by economists and a 5.1% rise in April. On a seasonally adjusted basis, exports fell 1.2% in May from the prior month. The central bank is counting on exports growth to partially offset the impact of a sales tax hike to 8% from 5% in April, but the MOF data will be a worry for policy makers. Adding to the BOJ’s concerns over soft exports to Asia is the surprising weakness in shipments to the United States – Japan’s biggest export market – which suggests a recovery in advanced economies is slow to filter through to exporting firms.
This was underscored in Singapore’s exports for May, which unexpectedly fell on weak shipments to its key markets. The city-state’s non-oil domestic exports to the United States fell 8.8% in May from a year earlier, compared with 11.7% growth in April. In South Korea, exports to the U.S. rose 5.5% on-year, but that was much slower than April’s 19.3% jump. The MOF data showed Japan’s U.S.-bound exports fell 2.8%, the first drop in 17 months led by decline in car shipments, while exports to China rose 0.4% on-year. Exports to Asia, which account for more than half of Japan’s total exports, fell 3.4% in May from a year earlier, the first annual decline in 15 months.
Increases in exports are such a crucial part of Abenomics, it’s hard to overestimate their importance. Well, there are no increases, there are declines. To base one’s entire hopes and confidence of turning the world’s third largest economy around, on growth in the US, EU and China that doesn’t even exist, despite all the brouhaha about recovery that emanates from every media pore on a 24/7 basis, is a bet that the Japanese and their elected representatives should scrutinize until the entire onion has been peeled. Surely there are other options available, imaginable, than to recklessly add vastly more debt to an economy that’s already shouldering an until recently unthinkable load of it.
There comes a point when politicians basically put the lives and well being of their citizens on the line at a crap table in a dark and shady casino, pretending they’re still the ‘house’ while they’re not (they bet and lost the house). Japan and Abe are at that point. Savings rates have fallen through the bottom. Wages and spending have declined for years. Government bonds no longer trade, except when the Bank of Japan steps in. Today’s data make clear that exports won’t save the day, as other nations are mired in various stages of economic decline just as much and almost as deeply. In that light, and this is important to recognize, Japan is merely a step or two ahead of us other nations that live on debt and debt alone, and there’s no way it won’t schlepp us down all the more and all the more rapidly with it.
